The Real Bad Guy in the E-Book Price Fixing Case

This week, the Obama administration’s Justice Department struck a great legal blow against our open market for books, and indeed against open markets in America. Even though online retailer Amazon has captured more than 50 percent of many key book markets—like the one for e-books—antitrust enforcers brought suit not against this vast and swelling monopolist but against the publishers who are the victims of Amazon’s power.

Their supposed crime? To do what is most normal in any real market: insist on the right to price your own product.

Now this vital marketplace is, for all intents, under the sway of a single boss. One that has a direct interest in stripping capital from publishers. One that has a direct interest in gouging all writers who must ride its rails. One that has a direct interest in suppressing any work of reporting that questions its power, or for that matter the political economic regime that enabled such concentration of power. One that is swiftly capturing direct control over much of the rest of the U.S. economy as well.

On the surface, the DoJ’s action may seem perfectly reasonable. The antitrust enforcers charged that five big publishers conspired with Apple to raise the prices of e-books by creating a new regime in which the publishers, rather than the retailers, priced their books.

Absent any other consideration whatsoever, higher prices do indeed result in a bad outcome: namely, fewer books in the hands (or on the screens) of American citizens.

But while cheaper e-books might be a good short-term outcome for some readers, and for those companies pushing for wider adaption of e-readers, there are significant downsides on the horizon. The DoJ’s action effectively robs publishers of the ability to price their own products and robs other retailers of any hope of competing effectively with Amazon. Hence the DoJ has all but guaranteed a future in which readers end up with fewer well-edited books—both physical and electronic—and in which writers feel less free to speak against concentrated power.

To understand how the DoJ got this issue so spectacularly wrong requires a look at how our anti-monopoly laws were watered down over the last generation.

For 200 years after the Boston Tea Party, anti-monopoly enforcement aimed mainly at distributing power and protecting the liberties of citizens. One of the hardest lessons we learned during those two centuries was to avoid the siren song of lower prices—precisely because they are so often used, consciously, to concentrate power.

Lower prices enable horizontal predation; when a fatly capitalized retailer (like Amazon) wants to bankrupt its less-wealthy direct competitors, it simply undersells them day after day after day. Furthermore, lower prices can be used in vertical predation, against producers; when a powerful retailer (like Amazon) wants to extract more wealth from its now-captive suppliers, it can set prices to promote those firms who accept its terms and to punish those who resist.

That’s why Congress used the Interstate Commerce Act of 1887 to restrict the pricing power of railroads. That’s why, in the 1930s, Congress used the Robinson-Patman and Miller-Tydings Acts to limit the ability of retailers and manufacturers to manipulate prices.

Over time, it became clear that the best way to lower prices over the long run was in fact to allow producers to set higher prices today. That’s because doing so forces producers to compete with producers rather than retailers. And it forces retailers to compete with retailers rather than with producers. The result being that we end up with both producers and retailers doing a better job of serving the consumer.

The laws designed to restrict price predation also helped not merely to arrest the consolidation of power begun during the Plutocratic era, but to reverse the process. One result was that Americans enjoyed a truly open market for books well into the 1980s, one that delivered well-edited, provocative works priced to fit almost any budget.

So how do we restore our open market for books?

Unfortunately, the antitrust technocrats in our Justice Department are under the thrall of a dangerous ideology.

The intellectual and legal “regime” that guides enforcement of our anti-monopoly laws dates to 1981, when a strange coalition of consumer activists on the left and Chicago School “market fundamentalists” on the right joined to promote a new frame, designed in theory to promote the “welfare” of the “consumer” rather than the well-being of the citizen. The main goal was no longer competition but lower prices.

It’s not that the 1981 changes were entirely wrong; at the time, the United States was suffering from double-digit inflation. But in the three decades since, the government never readjusted this frame, even though we licked inflation long ago, and even though it is now clear that the change helped to clear the way for the most wide-ranging concentration of economic power in our history.

We need to re-empower producers to set a minimum price for their goods, just as the book publishers attempted to do with their “Agency” model—the one the DOJ found so objectionable. Doing so would help to prevent Amazon (and other goliath trading companies) from continuing to use its immense and unfair pricing power to bankrupt other retailers, to loot the profits of and capture control over their suppliers, and to manipulate the content of the product itself.

Some of the publishers quickly settled with the Justice Department. But at least one—Penguin—appears ready to continue this fight in court. Doing so will hopefully extend this debate long enough for the American people to relearn how to make a market in America that works for all books, physical and electronic. And indeed enables us to relearn how to remake our other markets as well.